calculator_creditcard.jpgIsn’t all debt bad? Some people who don’t understand the money market might think that any amount of debt is bad. The fact is that debt comes in all flavors and is rated differently by the credit bureaus too. What you may think is bad debt might actually be good debt that doesn’t impact your credit score as much as imagined.

Good debt is generally any debt that will help you accumulate wealth in the future. The debt is tied to an asset that appreciates or an education that increases your market value. It is not debt that has provided a one-time benefit and that will not help you meet your aims to increase your wealth. Good debt can also be debt incurred to increase your credit score by paying things back and showing a positive entry in your report. But, these are strategies that are taken on with this in mind, and not taken out to satisfy some temporary desire.

Bad debt is debt is any debt that provides no lasting value in the form of asset or increased market value. It is usually long-term debt that you can’t see yourself paying back soon and that will impact your credit standing and your net worth for a long time. Things that qualify for this label are credit cards and car loans.

What Is Good Debt?

First, let’s pinpoint what some experts believe is good debt. Mortgages are usually considered good debt if the value of your property is appreciating. We are now seeing markets where the home value is depreciating and this has really changed the rules, in terms of qualifying mortgage as good debt. If you are not upside-down on your mortgage and can ride out the next few years of erratic real estate values, you are probably going to see mortgage stabilize again as good debt. The reason for this is that it holds a major asset and that real estate markets can fluctuate, but in the long-term have proven historically solid.

Another form of good debt is school loans. We’re not talking any school debt. Typically debt to a four year accredited college for an undergraduate or graduate degree pays off significantly in increased earning power for the holder of the diploma. You do have to check the school’s qualifications and take something that can assure you a good job to pay off the debt when you graduate. School loans are not rated the same way on your credit report as other forms of loans like credit cards. So, even if you have thousands you need to pay back, it may not keep you from moving forward in life and can propel you past everyone else who didn’t get educated.

What Is Bad Debt?

A car loan may seem like a good debt, but it is actually a bad debt. It does hold the car as an asset, but a car is an asset that depreciates over time. Only antique cars appreciate and no one is going to take the risk of driving those everyday and ruining their investment. This is another reason it is bad debt. You ruin the car and you end up having to pay the loan back too and buy another car. New cars costs thousands of dollars and depreciate thousands when you drive them off the lot. They are not long-term investments and have large monthly bills attached to them.

Another form of bad debt is credit cards. You may have a lower monthly payment on a credit card, but it can balloon to large balances and keep you hampered in a mountain of debt. If you make a payment late, the interest rate can sometimes get changed to over 30%. This is unmanageable for most people in the middle-class and will impact their reports adversely too when they can’t make more payments.

A Balanced Portfolio

If you are trying to build wealth, increase your assets and decrease your liabilities. Don’t shun all debt as bad debt. Instead, seek to find ways to leverage good debt to help your net worth grow over time without having to work for that money or to front a larger down payment for the same benefit. As you appreciate in the market, your wealth increases and in comparison to your wealth, your debt burden will decrease. You will be able to pay it back faster and have more experience on how to manage a balanced portfolio that doesn’t get you into financial trouble.

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